Trésorier/Treasurer magazine - N°86 - Jul/Aug/Sep 2014 - (Page 26)

ONLINE WWW VERSION FORUM The Case for Investing in Convertible Bonds LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE - N°86 - JUL / AUG / SEP 2014 By Marc Basselier, CFA Portfolio Manager, AXA Investment Managers 26 In recent years, the convertible bond market has seen a marked shift in the investor base away from leveraged investors - e.g. hedge funds and proprietary trading desks - towards institutional investors looking to seize both tactical and long-term opportunities. Niche status of the asset class has fallen away as investors come to realize the benefits that convertible bonds can add to their portfolios. The value and risk profile of a convertible bond can be split into three categories, depending on the price of the underlying shares: bond-like, balanced or equitylike. When the share price is high relative to the conversion price, the convertible will have a more equity-like profile. When the share price is low compared to the conversion price the convertible behaves like a corporate bond and is more sensitive to bond market conditions and the default risk of the issuer. The balanced profile is the ideal point to capture asymmetric returns, as sensitivity to the potential upside is greater than the sensitivity to the safety feature of the bond floor. Convertible bonds' investment performance is primarily driven by equity market performance. Although convertibles underperform global equities on the upside, they outperform global equities on the downside thus, delivering attractive return with less overall volatility. Two factors explain convertible bonds' performance. First, convertible bonds capture much more of the upside in an equity bull market than of the downside in a bear market. Second, the coupon payments provide investors a fairly Given the importance of the equity steady income stream. component of convertible bond's In the current low interest rate performance, a focus on the upside environment, convertible bonds can harness the upside potential of return potential - e.g. the ability to equity markets and offer investors correctly identify companies with both diversification and higher strong prospects for share price return compared to what's avaiappreciation - is key. lable from traditional fixed income securities. Convertible bonds also stand apart from traditional By the end of 2013, the convertible bond fixed income securities for having market has grown to roughly USD 365 performed the best in rising rate periods billion, according to BoA Merrill Lynch. relative to other fixed income categories Today, the breadth of the market proover the last 20 years, according to recent vides investors with an opportunity to analysis by Morgan Stanley. This lower diversify across credit quality of issuers, sensitivity to interest rate moves can full market capitalization spectrum, secbe explained by their typically shorter tors (see figure below) and regions. maturities and the embedded optionality of the security. Structural demand for convertible bonds is driven by risk-based regulations like Solvency II. Investing in convertibles can potentially offer insurance companies an opportunity to capture equity-like returns with a lower capital charge than would otherwise be available through a pure equity investment. In 2013, we saw a resurgence in new issuance of convertible bonds. Apart from strong demand from investors showing more appetite for risk assets, major drivers for increased convertible issuance are rising interest rates and strong equity market performance. Pick-up in M&A activity and bank disintermediation will also play a positive role in further increase in issuance of convertible bonds.

Table des matières de la publication Trésorier/Treasurer magazine - N°86 - Jul/Aug/Sep 2014

Couverture
SOMMAIRE
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW David Holland
FOCUS
FORUM
CORPORATE FINANCE
15 MINUTES WITH INTIX
THE FINANCIAL RISK OBSERVATORY
NEWS

Trésorier/Treasurer magazine - N°86 - Jul/Aug/Sep 2014